U.S. Accuses Medco of Paying Huge Kickback to Health Insurer

By Dinah Wisenberg Brin for Dow Jones Business News, 12/09/03

PHILADELPHIA -- The federal government filed an amended complaint Tuesday in
its civil fraud case against Medco Health Solutions Inc. (NYSE:MHS - News) ,
accusing two former executives of involvement in filing false claims and adding
a new count charging the pharmacy-benefits manager of violating an antikickback
law.

The new count against Medco accuses the company of making improper payments
to health plans to induce them to select the company as a pharmacy-benefits
manager for government contracts.

The move, announced by U.S. Attorney Patrick L. Meehan in Philadelphia,
follows the filing of the government's initial false-claims complaint against
Medco on Sept. 29. The original complaint arose from two whistleblower lawsuits
against the company.

In the initial complaint, the government laid out a long list of alleged
violations, accusing Medco of destroying patients' mail-order prescriptions to
avoid penalties for delays in filling and mailing prescriptions, and mailing
prescriptions with fewer pills than ordered, overcharging both patients and
health plans.

Federal authorities also said Medco created false records showing that
doctors had been contacted to discuss the proper drug or dosage when they hadn't
been, and that the company intimidated pharmacists to certify new prescriptions
without direct contact with the doctor.

In the amended complaint, authorities added two former executives as
defendants, charging former Medco executive vice president Robert J. Blyskal of
New Jersey with causing the submission of false claims to the government by
covering up the intentional destruction of patient prescriptions at a Medco mail
order pharmacy in Tampa in 1998.

Mr. Meehan's office also said Mr. Blyskal made misleading statements about
the coverup to the Justice Department.

Diane M. Collins of Florida, a former vice president and general manager at
the same Tampa mail-order pharmacy, was charged with violating the false claims
act by destroying and directing the destruction of patient prescriptions there
in 1999 and 2000 to appear to be providing prescriptions on a timely basis, Mr.
Meehan's office said.

The alleged violations arose from Medco's contract with the Blue Cross and
Blue Shield Association to provide mail-order prescription drug benefits to
federal employees, retirees and their families, the U.S. attorney said.

"The conduct alleged in the complaint is a financial fraud on employee health
benefits programs funded in whole or in part by the United States. Moreover, it
is a fraud on the patients who rely upon Medco mail-order pharmacies for their
prescriptions, and on the judgment and professionalism of the licensed
pharmacist which safeguards their health," Mr. Meehan said in a statement.

Attorneys for Mr. Blyskal and Ms. Collins weren't immediately available
Tuesday afternoon. An answering machine picked up at the residence of a Robert
Blyskal in New Jersey, and there was no answer on the line of a Diane M. Collins
in Florida.

The government alleges that Medco paid a health plan $87.4 million in cash in
the last two quarters of 2001 to obtain favorable consideration for its bid to
win a pharmacy-benefit-manager contract. The contract covered services for 60,
000 Medicare beneficiaries and numerous federal employees and dependents.

The payments were represented as reimbursement for systems and other costs "
but were in fact intended to improperly influence the award of the pharmacy-
benefit-management subcontract," the government complaint alleged.

The government believes Medco, spun off from Merck & Co. (MRK) in August,
made cash payments to other health plans as well to induce them to choose the
company as a PBM subcontractor where the prime contract was between the U.S. and
a health plan, the complaint said.

The government also said in its complaint that Medco Health employees and
managers canceled and destroyed thousands of patient prescriptions and delayed
thousands of others, making false statements and reports to cover up the illegal
conduct.

U.S. Attorney Meehan, in a statement Tuesday, said "pressure by an employer
to reduce costs and increase profits must never be allowed to coerce pharmacists
into ignoring their duties to patients.

"Getting the proper medication in the hands of patients as quickly and
efficiently as possible should be the mission of any pharmacy-benefit manager.
However, these allegations suggest that, somewhere along the line, the focus
became the profit instead of the patient," Mr. Meehan said.

The government said Medco imposed quotas on all professional personnel in its
mail-order pharmacies to meet company cost objectives, and that these quotas led
to the improper cancellation of prescriptions.

The complaint alleged that senior company officials condoned false reporting
of turnaround times by mail-order pharmacies because some contracts contained
penalty provisions for delays.

In one example of an illegal practice, the government alleged, the company
used a semitrailer parked behind a Tampa pharmacy to hide pans containing
prescriptions that were past their turnaround time, so that visitors from Blue
Cross/Blue Shield couldn't see them.

When pharmacists at the facility approached then-Medco President Richard
Clark in 1998 with their concerns about canceled prescriptions, he delegated
responsibility for the issue to Mr. Blyskal, who had authorized the improper
prescription cancellations, the complaint alleged.

Mr. Blyskal was employed as executive vice president of Medco Health through
June of this year, the complaint said.

Ms. Collins, appointed as general manager of a Tampa mail-order pharmacy in
1999, developed a system to allow her to create false records to be submitted to
Blue Cross/Blue Shield, the government said. Although not a pharmacist, she had
access to the pharmacy's computer operating system and altered prescription-drug
records to meet turnaround objectives, the complaint said.

Ms. Collins left the company in January 2001 with a year's severance pay and
full benefits, plus a $40,000 bonus -- a severance package that, according to
the government, led her to assume full responsibility for improper conduct at
the facility and to protect more senior executives from being implicated.

The government's complaint against Medco, submitted also by Associate U.S.
Attorney James H. Sheehan, has been assigned to U.S. Judge Clarence C.
Newcomer.

Medco Challenges Govt Allegations

Medco issued a statement later Tuesday challenging the government allegations
and vowing to fight them.

"We stand firm and confident in our resolve to aggressively defend ourselves
against the allegations," Medco general counsel and secretary David Machlowitz
said.

"The assistant U.S. attorney was aware that we were about to file a motion to
dismiss the original complaint and that the whistleblowers, who provided the
foundation for many of the allegations, had been discredited," Mr. Machlowitz
said.

"We expect to file a motion to dismiss the amended complaint by Dec. 30," the
statement said.

Terms of the client contract cited in the government complaint were disclosed
by the client and widely reported two years ago, Medco said.

In late 2001, after awarding a five-year PBM contract to what was then Merck-
Medco, Oxford Health Plans Inc. reported that it received $87.4 million from
Medco, mostly in connection with an alliance with the company. Oxford said at
the time it would provide health care information and consulting services to
Medco; the payments included $4.5 million to offset costs associated with
implementing the PBM contract.

"We believe that each of the allegations is false, overstated, or pertains to
unauthorized instances over several years that were identified and corrected,"
and the company is aware of no situation that compromises its "high level of
patient care," Mr. Machlowitz said.

Medco Chairman, President and Chief Executive David Snow reiterated his
previous statement that, "The full story will show that our people are highly
skilled, our policies are rigorously enforced and our pharmacy practices --
which are regularly inspected by state boards of pharmacy -- lead our industry
in lowering the cost of providing high-quality pharmacy healthcare for millions
of Americans."